It is a little known fact that it was the Whig chancellor Sir William Harcourt who introduced the notion of a death duty tax in 1894. The subsequent Inheritance Tax remained unchanged until 1975, when a significant alteration by Dennis Healy made all major gifts throughout an individual's lifetime subject to tax.
A further change came in 1986 when Margaret Thatcher allowed these gifts to pass free of tax, provided that the grantor lived for seven years after giving the gift. Since then things have gone steadily downhill, with endless tinkering. But, as the late Lord Jenkins said, “inheritance tax is a voluntary tax paid by those who distrust their heirs more than they dislike the Inland Revenue”.
On the assumption that there are still some who might like to do something about IHT, a consideration of the merits (or otherwise) of using Alternative Investment Market (AIM) shares might prove useful. There has always been some misunderstanding as to exactly how this works and the first, essential matter relates to checking whether the share qualifies for Business Property Relief (BPR) — the relief that makes the shares exempt from IHT on death.
For this relief to be obtainable, the majority of the company's business must not involve dealing in land, stocks, shares, securities or holding investments.
But of course it not quite so simple. If, in addition, the company holds Excepted Assets, full BPR will not be available either. Excepted Assets are those that have not been used throughout the last two years for the purpose of the business and the only way of finding this out is to examine a copy of the company's accounts.
So what happens if an AIM share does really well and goes on to the main stock market? In this case there is an obscure device called Replacement Relief, which roughly states that if you dispose of one BPR qualifying asset and immediately buy another BPR qualifying asset, then you do not lose BPR.
Although not all AIM shares will qualify for BPR, for the reasons outlined above, it is possible to build a good, diversified portfolio, a reasonable portion of which will also pay dividends.
Aside from checking for BPR, there are further, fundamental investment checks to be made. The three tenets to follow are:
la good balance sheet.
la good business model.
Inevitably much of this information can be sourced on the web, but an even simpler method is to look at an AIM portfolio, where much of this information will already have been collected by the portfolio manager. The trick when using such services is to continue asking for answers to these key questions. Do not assume that these people are infallible and keeping them up to the mark is never a bad thing.
So, having decided to use AIM shares to improve your IHT position, when would you use them? First thoughts concern those who have built up a large ISA portfolio. Assuming there is no requirement for income, it would be a simple matter to reinvest part of this into an AIM portfolio. For those who do not wish to make outright gifts, but whose life expectancy is reduced, this is a useful device.
More difficult is the area that relates to risk. Investing in small companies will always be more risky than with other asset classes. The rewards, however, can be higher and thorough research can also reduce the risk somewhat. There is, in addition, one other risk — the perennial one of whether a current or future Government will change the taxation rules.
Logic would suggest that, like the ISA (Individual Savings Account), BPR will continue and, as long as it is not abused, then there can be little reason for a Government to change it. The whole point of the AIM market is, after all, to give growing, profitable companies a chance to grow more quickly and thus provide more corporation tax for Government coffers.
In conclusion, this could be a very useful tool in your portfolio planning and a simple, cost effective method of reducing the IHT bill for your heirs.
Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services which is regulated by the Financial Services Authority. To contact him, use the website www.realwealthmanagers.co.uk